Brookdale Senior Living Inc.

Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the Brookdale Senior Living Q3 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and one I would now like to turn the call over to Jessica Hazel, Vice President of Investor Relations. You may begin.

Thank you, and good morning. I'd like to welcome you to the third quarter 2024 earnings call for Brickdale Senior Living. Joining us today are Cindy Beyer, our President and Chief Executive Officer, and Dawn Cusseau, our Executive Vice President and Chief Financial Officer. All statements today which are not historical facts may be deemed to be forward-looking statements within the meaning of the federal securities laws. These statements are made as of today's date, and we expressly disclaim any obligation to update these statements in the future. Actual results and performance may differ materially from forward-looking statements. Certain of the factors that could cause actual results to differ are detailed in the earnings release we issued yesterday, as well as in the reports we file with the SEC from time to time, including the risk factors contained in our annual report on Form 10-K and quarterly reports on Form 10-Q. I direct you to the release for the full Safe Harbor Statement. Also, please note that during this call, we will present non-GAAP financial measures For reconciliations of each non-GAAP measure from the most comparable GAAP measure, I direct you to the release and supplemental information, which may be found at brookdaleinvestors.com and was furnished on an 8K yesterday. Now, I'll turn the call over to Cindy. Thank you, Jessica.

Good morning to all of our shareholders, analysts, and other call participants. Welcome to our third quarter 2024 earnings call. At Brookdale, we are deeply committed to creating value for our shareholders by providing high quality care and services to our residents, ensuring that we are an attractive place for employees to work, and improving both our capital structure and our capital allocation. Before getting into details of the third quarter, I would like to briefly highlight a number of recent accomplishments that reflect this commitment. We delivered 80 basis points of sequential quarterly occupancy growth, which was better than the broader industry average and reflected continued weakness in paid third-party referral sources. We generated $14 million of adjusted free cash flow in the third quarter, improving our cash flow significantly over the prior year. We more than doubled the number of communities operating with our industry-leading Brookdale Health Plus program, and we received a third-party validation that our clinical outcomes are even stronger than last year. We worked to ensure the health and well-being of our residents throughout multiple hurricanes, including successfully evacuating 13 communities during Hurricane Milton. We were pleased with our team's emergency response and are pleased that our residents are back home. We were named by Newsweek to the top 200 most loved workplaces list. We executed purchase agreements for accretive acquisitions of 41 currently leased communities that will provide meaningful benefits to Brookdale, both in the immediate term and over the longer term. We issued new convertible debt while extending a majority of an existing convertible to 2029, which, in combination with expected mortgage financing and cash on hand, enables us to fund these acquisitions. We successfully refinanced the vast majority of our debt maturities without extension options through 2026, and at every level of our organization, we remain steadfast in our commitment to enriching the lives of those we serve with compassion, respect, excellence, and integrity. In the third quarter, REVPAR grew 5.9% over the prior year. At the same time, adjusted EBITDA grew 15% year-over-year to $92.2 million, roughly the midpoint of our previously provided guidance range. Third quarter occupancy growth, while significantly better than historical seasonal trends, was not as robust as we had wanted. Move-ins improved from the second quarter but remained below prior year. primarily driven by continued softness from two large paid third-party referral sources. As I shared last quarter, we are redeploying marketing spend from these sources to internal marketing and advertising channels. And while we have seen success at generating third-quarter leads and move-ins at a more attractive cost, internal move-ins were not able to fully offset the continued decline from paid third-party partners. We continue to work closely with these critical partners to improve performance and considering the pressures they are facing, we are pleased that in the third quarter, Brookdale grew share amongst the larger operators within one of the paid third party referral sources. Our sales and marketing teams are leaning in to new and unique sales campaigns at the local, market, and national level to drive qualified leads and attract new residents. For example, in the fourth quarter, we are expanding our professional referral targeting around our person-centered and clinical programs like Brookdale Health Plus and ClearBridge. ClearBridge, which is Brookdale's evidence-based approach to memory care, has been recognized by the Alzheimer's Association for Alzheimer's and dementia, activities of daily living, and other person-centered care and assessments. We have also increased the number of communities that are hosting themed local events to introduce prospective residents to our high-quality care, personalized services, culinary experience, and Brookdale Strong value proposition. I am confident that all of our sales and marketing initiatives, including those I just mentioned, will support sustainable occupancy growth. In our efforts to grow the top line, we remain intensely focused on our priority of returning to pre-pandemic occupancy levels while maintaining our steadfast commitment to profitable occupancy growth and to getting every available unit in service at the best profitable rate. Compared to the prior year, third quarter same community rev pour grew 4.2%, which was an acceleration from the second quarter year-over-year growth rate. We were pleased that our rev pour growth accelerated sequentially Whereas Nick reported that the industry experienced a sequential deceleration in average acting rent growth. This, coupled with our diligent focus on appropriate expense management, supported third quarter same community adjusted operating income margin expansion of 100 basis points over the prior year, while continuing to meet our resident needs, provide high quality care and personalized service, and remain in compliance with applicable regulations. Don will speak in detail to our fourth quarter guidance, but I would like to provide a couple of high-level perspectives. Our near-term expectations reflect careful consideration of everything I've spoken to. I'm optimistic about our future and our continued year-over-year occupancy and adjusted EBITDA growth in both the next quarter and over the long term. I also understand that third quarter move-in volume has an impact on future months and we are appropriately considering this in our fourth quarter guidance ranges. Our guidance also includes approximately $3 million the fourth quarter hurricane expense, as approximately 70 of our communities were impacted. This level of expense has a meaningful impact on our results, but supporting the safety and well-being of our residents and associates is worth every penny. This is our overarching priority and is at the core of everything we do. I'm excited to share some updates about our Brookdale Health Plus program, which also directly supports our overarching goal of the health and well-being of our residents and associates. As I've mentioned before, Health Plus is an innovative care delivery model designed to support an enhanced quality of life for our residents through technology-enabled, evidence-based preventive care coordination. It focuses on addressing the unique needs of seniors with chronic conditions by coordinating care and minimizing gaps, which are unfortunately common in the aging population. Recently, we received results from an expanded third-party analysis focusing on communities that have been on the HealthPlus platform for at least 12 months. The findings were incredible, showing that we have built on the success of HealthPlus, including 80% fewer emergency room and urgent care visits, and 66% fewer hospitalizations compared to seniors living at home. In fact, our resident outcomes in HealthPlus communities were even stronger when compared to the outcomes for similar residents in other senior living communities within the industry, according to an independent analysis. These results reaffirm our belief that HealthPlus provides a key competitive advantage for Brookdale, and its positive impact will grow even further. This month, We are completing our final HealthPlus rollouts for 2024, bringing the total to 130 communities, and we look forward to sharing future updates as we prepare for further expansion in 2025. As you can see, we continue to make progress on enhancing operations, but our focus on value creation for our shareholders doesn't stop there. At the close of the third quarter, we were very pleased to announce a series of accretive transactions. These included agreements to acquire 41 communities from three existing triple net lease portfolios, a private convertible senior notes transaction through exchange and new issuance, and a favorable rate agency financing transaction with simultaneous repayment of a 2025 debt maturity. Specific to the planned community acquisitions, By replacing future lease obligations with more favorable ownership structures, we are increasing our cash flow, reducing exposure to escalating lease costs, benefiting from long-term value creation opportunities, and gaining greater strategic flexibility to manage our portfolio. Overall, the communities we are acquiring are high-quality assets with above-average performance in good markets, many of which are high-growth affluent markets. We have confidence in these communities and have proven that we can successfully generate and sustain value from them. As a result, ownership of these communities allows us to take full advantage of the senior living industry's positive growth outlook, enhancing our expected financial results with predictable high yield returns. Specific to the convertible financing, by extending the vast majority of our 2026 senior notes to 2029 at a higher conversion price, And by securing additional funding through newly issued 2029 notes with two of our key shareholders, we are able to support these unique acquisition opportunities with favorable capital market terms. These immediately accretive transactions are expected to increase adjusted EBITDA by approximately $33 million annually and improve adjusted free cash flow by an estimated $15 million annually following closing. Lastly, on our February earnings call, we will be providing 2025 annual guidance, but I wanted to take a moment to introduce some early perspectives for next year. We are unwavering in our commitment to profitable growth and to achieving consistent, positive, adjusted free cash flow. Our strategy has consistently prioritized long-term objectives and progressing towards the meaningful organic growth opportunity that lies ahead. We can achieve this opportunity by remaining intensely focused on our key strategic priorities, which allow us to navigate short-term fluctuations with a clear and consistent framework for long-term success. For 2025, our strategic priorities will remain. First, get every available room and service at the best profitable rate. Second, attract, engage, develop, and retain the best associates. And third, earn resident and family trust and satisfaction by providing valued, high-quality care and personalized service. In 2025, we expect to deliver another year of steady and sustainable occupancy growth. Similar to pre-pandemic, our resident rate increases will be reflective of the increases in cost of living and the cost of operations, which have moderated but remain above pre-pandemic levels. In 2025, we will maintain our ongoing commitment to appropriate expense management at both the community level and at our community support centers, while ensuring we continue to meet our residents' needs, provide high-quality care and services, and remain in compliance with applicable regulations. As an example, upon the expiration of their lease terms this year, we reduced our physical office space in both Milwaukee and Nashville by approximately 75% in total. which provides several million dollars of annualized lease expense reduction. These are just a few of the high-level considerations that support our expectation that like 2024, 2025 will be a year of adjusted EBITDA growth and meaningful adjusted free cash flow improvement. I am confident in Brookdale's strong positioning for meaningful long-term growth, particularly as we make further progress toward restoring pre-pandemic occupancy levels. This confidence is driven by favorable supply-demand dynamics, our continuous improvements in operational performance, and our resilient business model. Additionally, Brookdale's competitive advantages uniquely position us to capitalize on the unprecedented target demographic growth ahead. As demand for our communities and services grow, we expect this to fuel significant growth in operating income and create long-term value for all stakeholders.